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It is gradually dawning on Washington that a meaningful reform of the Medicare program will be unavoidable in the coming years. Medicare is at the center of both our health care dilemma and our fiscal crunch, and it will be very difficult to avoid a calamitous debt crisis without making changes to the program’s basic structure.

Elwood H. Smith

Medicare’s problem is not just overspending. In a sense, the program’s travails mirror (and severely exacerbate) those of our economy and welfare state more generally: The stifling of competition and innovation creates a crushing inefficiency that makes the system unsustainable​—​giving off a strong whiff of institutional decline, and intimations of a terrible crash to come. Yet correcting the problem, in Medicare’s case as with our broader predicament, presents an enormous political challenge, because recipients of benefits are powerfully resistant to change.

Democrats have long used the prospect of changes to Medicare as a way to scare older voters, and Republicans have long responded by avoiding serious talk of reform. But this spring, Republicans in the House of Representatives broke with this pattern and passed a bold and promising reform as part of their annual budget resolution, produced by House Budget Committee chairman Paul Ryan. Democrats, however, have stuck to their pattern and sought to use the Republican proposal as election-year ammunition. When she was asked in May what the Democrats’ top three election issues would be in 2012, House Democratic leader Nancy Pelosi said they were “Medicare, Medicare, and Medicare.”

More by Yuval Levin

Polls this spring and summer suggested a surprising degree of openness among the public to Ryan’s kind of reform, but the Republican presidential candidates are clearly concerned that once the campaign really gets going, the Democrats’ scare tactics will again succeed. While a few GOP contenders have offered passing good words for the Ryan budget in general, they have largely steered clear of Medicare so far​—​neither endorsing nor rejecting a serious reform. They are surely aware that fixing Medicare is essential to the nation’s fiscal future, but they also know the issue can be politically explosive. They are thus badly in need of a Medicare reform proposal that could implement significant structural change while effectively assuring voters that seniors will not be put at risk​—​a proposal that would overcome the potential political challenges of the House Republican approach while retaining its substantive benefits.

The organizing principle of such a proposal should be not austerity, but innovation​—​not the need to reduce costs as such but the need to unleash creativity and enterprise to find more efficient ways to provide higher quality care more affordably. That is what our health sector lacks above all. Focusing on innovation and dynamism can help us learn from both the strengths and the weaknesses of the Ryan proposal, and could provide a Republican presidential candidate with a politically appealing and substantively promising proposal of his own.

If it is properly conceived, such a proposal could also offer a model for reforming the welfare state more generally​—​unleashing the kind of innovation and efficiency that our entire economy so sorely lacks today.

The Disaster Ahead

The record deficits of the past few years have largely been a function of an explosion of discretionary spending. But the utterly unprecedented debt disaster we confront in the coming years​​—​​—​the projected ballooning of spending and borrowing that has our creditors nervous and will leave us with a national debt larger than our economy in just a decade and twice as large in the 2030s​​—​​is a function of an explosion of health-entitlement costs and especially Medicare costs. The Congressional Budget Office projects that the already immense cost of our health programs will double as a share of the economy by the early 2030s and nearly triple by 2050, while all other federal spending combined (except interest payments) will actually decline as a share of the economy. Health-entitlement costs will thus account for essentially the entirety of our debt explosion, and Medicare will account for the bulk of those costs​—​as our population ages and the program’s grossly inefficient design pushes health inflation ever upward.